12/20/2011 8:03 PM ET|
What's killing pot sellers: Taxes
Federal law bars any business that sells medical marijuana from taking tax deductions. And while a dispensary may be able to hurdle that barrier, criminal ones also await.
Nearly 200 years ago, Supreme Court Chief Justice John Marshall put it simply, "The power to tax is the power to destroy."
President Barack Obama and his Justice Department have adopted that maxim. In an attempt to destroy medical marijuana, they're using the U.S. tax code to put state-authorized weed dispensaries out of business.
Way back in 1982, Congress enacted tax code Section 280E to deny all tax deductions to an individual trafficking in controlled substances that are prohibited under federal law or under the law of the state in which the taxpayer conducts business. Marijuana falls under the federal Controlled Substances Act and therefore is within the scope of the deduction disallowance.
Despite multiple state laws that now allow the sale and use of marijuana for medical purposes, the U.S. Supreme Court concluded in 2001 in United States vs. Oakland (Calif.) Cannabis Buyers' Cooperative that no exception to controlled-substances law exists for medical marijuana.
If you sell marijuana, you get no expense deductions to offset your sales revenue. A marijuana dispensary is taxed on gross revenue rather than net income.
Say a dispensary generates $100,000 in gross sales. The cost of the product could be $60,000, with salaries, rent and other operating expenses reaching an additional $30,000. That would give the business a pretax profit of $10,000, which at the lowest corporate rate of 15% would create a federal tax liability of $1,500. That would leave an after-tax profit of $8,500.
But not under current federal law, Smoke Breath. The Internal Revenue Service would deny all deductions and apply the tax rate to gross sales rather than to net income. At the 15% rate, that would generate a $15,000 tax, more than the $10,000 the business had left after expenses.
The federal tax alone confiscates more than 100% of the profit, and you couldn't make it up with volume. In fact, the actual corporate tax on $100,000 would be $22,250, $12,250 more than the hypothetical company had left after expenses. That's a tax rate that would make even Warren Buffett blush -- 222.5%!
It's already happening. For instance, the Harborside Health Center, an Oakland medical-marijuana dispensary, was hit in October with a $2.4 million bill for back taxes from the IRS.
No place to sell, either
If you thought the IRS was tough on dispensaries, wait until you hear what else the feds have waiting for them. How about a California order to shut down in 45 days or face federal criminal charges and forfeiture of all their property, even if operating legally under state law? The federal asset-forfeiture rule applies even to landlords renting space to dispensaries, the U.S. government contends.
Such actions could include forced evictions that may be prohibited by state law. The issue would be argued in a state court, before a state judge, under state rules. The judge would be asked to balance the property rights of the landlord against the contract rights of the dispensary to occupy the leased premises.
Say a dispensary successfully fights off eviction. The federal law still would forfeit the property to the U.S. government, which would become the dispensary's landlord.
And don't forget the criminal charges, with added penalties for selling drugs within 1,000 feet of schools, parks and playgrounds.
What's a dealer to do?
The solution to the tax issue is relatively easy. A dispensary would need to qualify as a tax-exempt organization. If it was organized and operated exclusively for a qualifying charitable or scientific purpose, it would avoid tax on any profits. The denial of all business tax deductions wouldn't be an issue.
The key here is the purpose and operation of the organization. "Nonprofit" doesn't mean you don't make any money. It just means your objective was not to make a profit. Many qualified nonprofit organizations generate substantial positive cash flow and pay healthy compensation to their management teams. Forbes magazine reported that the average top pay for the 10 largest nonprofit U.S. charities was $566,693 a year.
The bottom line is that, with an attorney's help in setting up the dispensary's organizational structure, the tax issue could disappear.
The criminal issues are another matter. An organization can be convicted of a federal crime even if its actions were legal under state law. Besides the going-to-jail part, the criminal conviction would probably jeopardize any tax-exempt status.
Short of the feds deferring to state law, perhaps the only solution would be to create dispensaries as quasi-state organizations. As part of the state government, they would be exempt from federal taxation. More importantly, the criminal issues should also disappear.
Another solution: Congress could just change the law. Surveys indicate that about 50% of Americans favor legalization of marijuana and that more than 70% want it legal for doctors to prescribe marijuana to reduce pain and suffering. What do you think?
Jeff Schnepper is the author of the best-selling book "How to Pay Zero Taxes," which is in its 30th edition. He is a former professor of taxation, accounting and finance. Schnepper now has a full-time tax planning and legal practice in Cherry Hill, N.J. Click here to find Schnepper's most recent articles.
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Tha war on drugs is a huge failure. Marijuana should be legalized now and taxed like any other business. The current laws criminalize good citizens that just happen to smoke pot.
More stupidity from this admistration and it's predecessors.
I think it should be legalized, taxed, and controlled the same way alcohol and tobacco is. The tax revenues would help out all levels of government, the product would be regulated and safer, and the price would probably go down even with the extra taxes. Not to mention the jobs for this would all come back to the USA. All of this happened with the end of prohibition. And law officers could concentrate on really bad stuff like meth and crack.
And this from someone who does not use pot nor do I intend to. (When you get older you won't want to be wasting part of your limited conscious life!) I do know it's not as bad as alcohol and tobacco, physically, so someone who quits isn't as damaged in the long run.
This is great. The U.S. economy is in the crapper and this is what our elected officials are wasting their time on? I am ashamed of the politicians and law enforcement in this country.
These losers should be spending their time trying to figure out how to bring back jobs to the US, keep the middle class from falling off the cliff, and fix our crumbling infrastructure. Law enforcement efforts should be directed at real crime and other things like, oh, keeping our borders secure and getting the illegals out of the country. The war on drugs is a failure, yet every year we keep pumping millions and millions of dollars into it. Every day what I see our politicians doing is just like the old saying: "Nero fiddled while Rome burned."
Welcome to the new Roman times folks!
OK, here we go. IF the government got their collective heads out of their collective a$$e$ and REALLY gave a $hit about the people of America they would have no choice but to come to some very basic conclusions:
1) Legalization of marijuana (NOT just for medical use) would bring in a HUGE amount of taxes. This would help offset our growing deficit in a couple of ways. 1a) lessen the burden on law enforcement upholding a retarded law in the first place, 1b) remove a TON of inmates from federal prisons on "pot-related" charges that we, as taxpayers, are paying for.
2) Legalization would CREATE jobs. Yes, it grows naturally, but the new companies (and some old ones. Hello RJ Reynolds, hello Philip Morris) would want their product to be as profitable as possible. That means paying employees to tend the plants, harvest, process, package, and deliver their product to retailers. Hmmm... maybe this won't work. After all we have so little unemployment in the USA now, right? (Yes, people this IS sarcasm).
3) Legalization could help with the ecology. Reducing a "carbon-footprint" is only solving HALF the problem. The other half is to plant more trees / bushes to help "scrub" the air clean.
4) Legalization would also allow products to be made with hemp. Clothes, textiles, plastics, alternate fuels, food filler (instead of cellulose from trees), etc...
All of the above create jobs, increase taxable revenue and increase our "freedoms". After all, why would ANY government that professes to be "OF the people, By the people and FOR the people" want to be more oppressive when more than 50% of the PEOPLE want it legalized?
You guessed it. Politics. Obama needs to be ousted. The Democrats need to be ousted. The Republicans need to be ousted. None of them really WORK for a living. They mooch off of OUR money THEY pass taxes on and then tell us "it's for your own good"? "F" you, a$$holes! Get a real job. Pay your fair share of taxes. Pay into Social Security like the rest of us. Stop padding your own pockets with funds from the pharmaceutical companies, Weyerhauser, DuPont and other special interest groups and DO YOUR JOB! Your job, by the way, is to REPRESENT our wishes in Washington D.C. I have YET to see ANY of those idiot represent our interests. Just my two-bit opinion, but it makes sense to me. Just sayin'. Hope everybody out there has a great Holiday Season (except politicos. YOU I hope burn in Hell).
alright time to go take a hit! peace!
I am a medical marijuana patient in Maine who uses marijuana to fight pain, nausea and to help fight insomnia. I had to stop smoking marijuana for a month in order to pass a drug test that the federal government says my doctor must give me in order to receive my narcotic pain medication. The federal government also tells my doctor that if I test positive for any federally illegal drug that my doctor is to notify the police and that he can not give narcotics to alleviate pain. In other words, the feds are turning doctors into federal informants which in my opinion goes against the doctor/patient confidentiality agreement.
During that month of not smoking medical marijuana I took more pain meds than I was comfortable with to help relieve pain, to the point where I ran out.
During that month of not smoking medical marijuana my nausea returned full force and I lost 15 pounds.
During that month of not smoking medical marijuana I had difficulty sleeping and had a very hard time concentrating at work because of pain, nausea and lack of restful sleep.
I believe the federal government should allow doctors to do their jobs, respect patient/doctor confidentiality rights, not force doctors to become federal informants and worry about doing their own jobs and not turning our United States of America into a police state.
The feds can not do their own jobs and are a total disgrace, but they feel it is within their rights to tell doctors how to do their job. It is turning into an us against them and revolution will soon follow unless the feds can start to listen to the people they (supposedly) work for, but the feeling I get is the feds truly believe the people are here to work for them.
I haven't been able to come up another plausible explanation.
Lets see, we have been in the drug war for some 50+ yrs. During that time, drug usage has (by one report) gone up by some 2800%. In that time, crime has exploded and our jails are full, and the illegals have overrun our country. The union backed police force has also increased by thousands (or hundreds of thousands). All this has cost by some estimates 2 TRILLION DOLLARS!
I fail to see the difference between Alcohol (during prohibition times) and weed. The one difference I do see is that the feds don't see how they can get a tax on an individual growing a small amount in their own home. Its all about the taxes that our feds can't get their grubby hands on to waste like the rest of our tax dollars. Nuff said.
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